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Managing supply, customer and client contracts during extreme events

Updated: Oct 14, 2020

Are you experiencing difficulties with suppliers of goods and services to your business under contracts you have entered into?

Are you experiencing difficulty in performing your obligations under your contracts with clients and customers?

Most commercial contracts include provisions which contemplate that the operation of a contract may be influenced by events outside the control of one or both of the parties to that contract (usually described as ‘Force Majeure’ events).

Such provisions usually go on to state what a party to a contract may do in those circumstances in order to avoid being in breach of the contract, and therefore exposed to a claim for damages.

Separately, the common law legal doctrine of 'frustration' generally applies to all commercial contracts.

The principles outlined in this information sheet are for guidance only and specific responses and advice will vary depending on the particular facts of your circumstances. What follows below is therefore general information only and should not be relied upon as legal advice.

Contractual provisions regarding Force Majeure

What is Force Majeure?

Force Majeure means unforeseeable circumstances that prevent a party from fulfilling a contract - an extraordinary event or circumstance beyond the control of the parties to the contract.

A Force Majeure clause is a contractual provision in an agreement that describes, specific and actual situations when it may be difficult (or impossible) to continue to perform a contract.

These contractual provisions usually go on to describe what the parties to that contract agree can be done about the event, such as temporary or permanent variation of the originally agreed terms, suspension (of the contract during the Force Majeure event, sometimes for a maximum period), and where the Force Majeure event continues for a lasting or lengthy time, the ultimate termination of the contract.

Each Force Majeure clause will be drafted differently, and will not necessarily relieve a party from all of its obligations to continue to perform a contract. Generally, a party to a contract will need to do all that it can to mitigate or limit the effect of the Force Majeure event.

The wording and effect of each Force Majeure clause will need to be considered separately as to the circumstances in which it applies, the period over which it applies and the options and actions that a party may take during, and because, of the Force Majeure event.

Force Majeure provisions do not, as a matter of common law, apply to a contract unless they are specifically included.

Is COVID- 19 an event of Force Majeure?

The advent, and spread of the COVID-19 virus and the social distancing and other guidelines being propagated by State and Federal Governments may not necessarily be a Force Majeure event. This will depend on the wording in the actual agreements being considered or affected and will need to be reviewed on a case by case basis.

Certainly, some of our clients have already experienced Force Majeure clauses being engaged, sometimes to their significant detriment, so the issue is real and live.

Our best suggestion is that you read the terms of the clause very closely and seek professional advice if you think you will be impacted or if you need to rely on the benefit of the force majeure clause.

The Common Law principle of “frustration” of a contract.

The common law doctrine of frustration will apply to all contracts whether or not an agreement specifically includes a Force Majeure clause. However, its application, effect and remedies are typically narrower than when an express Force Majeure clause is invoked.

Frustration of a contract occurs when an unforeseen event, beyond the reasonable control of a party, renders contractual obligations impossible or radically changes the party's principal purpose for entering into the contract.

Frustration does not necessarily apply to circumstances where it simply becomes more difficult to continue to perform a contract. Frustration does not simply mean hardship arising for a contracting party.

Each party to a contract must do all that it can to mitigate the effect of the unforeseen event, and the law expects each party to perform the obligations they promised to perform even if the bargain struck does not yield the benefits that were originally anticipated. So, frustration may not occur in every contract impacted by COVID-19.

By way of example, changes in law, after a contract has been entered into, that make the performance or operation of the contract illegal is a “frustration” event. A change in law that makes the performance or operation of the contract more expensive for a party is not.

The effect of frustration of a contract

If a contract is frustrated it is, in effect, terminated from the date that the event took place which prevented its performance. It does not relieve a contracting party from performing its contractual obligations up to the point of frustration. If the contract is terminated for the reason of frustration, then its further performance from that point forward is not required by either party.

There is some legislation governing frustration of contract (in NSW, Victoria and South Australia) which may alter the operation of the common law doctrine of frustration in certain circumstances.

The inclusion of a specific Force Majeure clause in a contract may also limit the applicability and effect of the doctrine of frustration.

Recommended considerations and action points

  • Review where your business and operations are currently experiencing problems or may likely experience problems in the immediate or near future.

  • Review existing contracts to establish if specific Force Majeure provisions have been included, and if they have, seek advice on their meaning, application and the options open to you if they can be invoked by you or the other party(ies).

  • Consider if you need to invoke Force Majeure provisions and prepare to issue the correct notice of Force Majeure, in the specific manner that notices are required to be served, as described in the relevant contract.

  • Where the ongoing performance of a contract involving the supply to your business of goods or services is fundamental to the continued operation of your business - can you take steps to avoid a party to that contract invoking Force Majeure provisions or frustration over that contract?

  • Consider how you may be able to mitigate a Force Majeure event wherever possible.

  • Tailor any new contracts being entered into to specifically include Force Majeure provisions to accommodate the effect and impact of the COVID-19 virus (and other consequential effects).

  • Seek advice on frustration of contracts in addition to invoking Force Majeure clauses (where present).

  • As an alternative to invoking a Force Majeure provision, or frustration, consider whether the other party to a contract would be open to negotiating variances or saving provisions to the contract for the duration of the COVID-19 impact.

If you need any assistance, please get in touch with us via our website or give us a call on +61 (2) 9300 3100. #contracts #coronavirus #forcemajeure #frustration .


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